Cadillac Tax

The inimitable Taranto brings up one problem with the Cadillac tax in Obamacare because, as Ezekiel Emanuel predicts, firms may drop health insurance and at best no more people will be insured through Obamacare.  It is a fun exercise in logic but this is not the biggest problem with the tax.

The tax estimates are an example of what goes wrong when you expand a trend over a very long period of time.  As the American Action Forum explains the tax grows exponentially because insurance is expected to grow the same way.  The presumption is that insurance costs paid by businesses in 60 years will be fourteen times the current cost.  So for businesses currently at the $27,500 threshold for the tax, that means that heath insurance in 2174 would cost $385,000.  So assuming two-and-a-half percent productivity growth over the next 60 years, and a current employee earning $40,000 in cash wages and $27,500 in tax free benefits, that current employee would be worth $297,000 in 60 years.  Such an employee would need to have negative cash wages of about $88,000 to be worth employing.  Of course, MWG is leaving the 40 percent tax out of this back of the envelope computation so the problem is substantially more acute.  Employers and employees have strong incentives to avoid this outcome.

A more rational expectation of what will happen with the tax is reported in Bloomberg:

“I don’t think there’s any employer that’s going to pay the tax,” said Wojcik, whose Washington-based trade group represents employers such as Wal-Mart Stores Inc. (WMT)American Express Co. (AXP) andTarget Corp. (TGT)

The CBO is already dropping expectations for the current decade.  If Wojcik is right then the funding for Obamacare is the out years is short one percent of GDP in about 40 years and three percent in about 60 years.  Rational reactions by businesses will put a bigger stress on Obamacare while causing enormous problems on the budget side.  Of all the poorly thought out mechanisms in Obamacare, the Cadillac tax might be the worst.

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Government Pensions Again

Jeff Jacoby is great but his take on governmental pensions needs some work.  MWG could be one of Jeff’s best friends because we are long-time government employees.  Our retirement is near and the outcomes are reasonably certain and positive because of a defined benefit pension and other post-retirement benefits.  He is right that retirements are often nicer in the public sector.

He is wrong that pensions are causing governmental entities to go bankrupt.  Governmental entities are going bankrupt because they have not paid their pension costs on time.  Detroit is a special case of bankruptcy.  Pension cost were a small fraction of Detroit’s liabilities in bankruptcy.  Detroit’s revenue was insufficient to run a city when it cratered in the last decade.  Until the end, it was not troubled by pension costs like Illinois, California, Minnesota or a variety of municipalities.  These entities are in trouble because they did not fully pay their pensions.  The politicians knew what they cost but chose not to pay them.  Minnesota, has opened an old chestnut by raising the expect return on investment.  Otherwise, entities just don’t pay the full amount.  It is Snidely Whiplash without Dudley Do-Right so the taxpayer is left with the bill.  The employees might shoulder some of the loss but the politicians are Snidely not the workers.

It is not the size of the pension and other benefits but the politicians paying on a timely basis.  Wisconsin funds its pensions at 100% and funds other benefits too.  This has been true long before the current governor.   Illinois and Chicago do not fully fund.  They could be more generous but funding is the problem.  Sometime, perhaps after the next election, they will need to make difficult choices.  If you make the right choice at the beginning, it is unlikely there will be a problem.

 

 

Buffet’s Billion, EMH, and AGW

Pay attention!  Warren Buffet and Quicken Loans is offering $1 billion for a perfect NCAA bracket.  The rules say it is the 63 games in the tournament proper so you don’t need to predict the four play-in games.  The odds are listed at 9.2 quintillion to one but it is less because some games, e.g., one versus sixteen, are highly predictable.  The point is that in evaluating performance it must be compared to some standard.  An easy one for the NCAA is do you get more points than the selection committee?  Since NCAA seeding is based on the whole season it is reasonable to beat it by weighting momentum.

That brings us to the efficient market hypothesis (EMH).  A recent article by Asness and Liew is a great non-technical summary (h/t Greg Mankiw).  Be sure to read it all to get their recommendations.  One of the issues they discuss is the joint hypothesis of EMH and Capital Asset Pricing Model (CAPM).  To compare investor performance, it has to be compared to some standard.  The authors believed they had found an inefficiency that they could exploit.  It turned out OK but it started badly because the initial results were below expectations.  It turns out that momentum is one of those keys to success.  It might be in the NCAA too.

Global warming has the same issue of predictions.  Recently the outcomes have led to the following observations:

Global temperatures increased at a rate of 0.22 Fahrenheit every decade since 1951; since 1998 warming dropped to  0.09 F per decade. Carbon dioxide, which is a greenhouse gas, has continued to rise at a steady rate.

These observances are inconsistent with predictions.  Carbon dioxide was supposed to drive temperatures.  Global warming has lost its momentum.  Will it recover?  NASA reports that the data is consistent with predictions before the lull.  It is possible but predictions are what science is about as the two other items discuss.  If you don’t beat the NCAA seeds in your bracket it might give you concerns about global warming.  If we buy the theory then we need to discuss the economic impact.

 

Handwriting

Kevin Williamson, as usual, has an entertaining piece on handwriting.  He had it easy because he was in the sixth grade in the 80s.  We are known as Cap-Lock for a reason.  Two plus decades before Mr. Williamson survived handwriting in his Texas sixth grade the stakes were even higher because the folks from the Palmer School of Handwriting would come to visit our elementary school.  The shame that would fall on MWG was right and proper but unfortunately, MWG’s performance made it difficult if not impossible the whole class to earn the highest award, a gold seal.  Gold stars were good but gold seals were great.  The teacher, the students, MWG, and perhaps the Palmer School folks hoped that one desk would be empty on that fateful day.  Memories are not entirely clear but it seems highly likely that MWG got the lump of coal, the black star, at least once.  It seemed unfair that there was no class award for the Iowa test as we would have been really helpful on those.  Blackening in the circle was within our skill set.

A related point is that the signature doesn’t need to look like a person’s name to be recognizable.  You might have a piece of paper in your wallet with Jack Lew’s signature on it.  The mark doesn’t look like much of anything but it is recognizably him.  The computer is most likely able to compare Williamson’s scrawl to his standard signature and agree that it is him.  It is is not necessary that all the letters be recognizable but that the unit be recognizable.  Incidentally, in the MWG signature all the letters are visible and it is likely that each one can be read individually.  The two things we have learned to do in the cursive world is sign our name and make an ampersand.

Our story has a different happy ending than Mr. Williamson’s because one of the witch’s brew of issues that makes our handwriting atrocious , a failure to distinguish left from right, makes us pretty inefficient at typing.  The number of times that MWG has switched an I to E or vice versa is now approaching infinity.  You would be correct if you infer from the previous sentence that the Williamson solution of averaging spelling and handwriting would provide no succor for us.  However, in the fullness of time, handball appeared and the confusion over which hand to hold the racquet abated.  Spell-check arrived and inefficient typing is still better than Cap-Lock.  The Palmer School stopped publishing in the 1980s!  Life is good.